Law360 (May 28, 2021, 8:55 PM EDT) -- A New Jersey federal judge has sent to the Western District of New York a proposed class action over Eastman Kodak Co.'s award of stock options to executives ahead of a $765 million COVID-19 drug loan announcement, concluding that that forum is the most appropriate venue even though none of the players asked for it.
In approving the transfer, Chief U.S. District Judge Freda L. Wolfson pointed out Thursday that Kodak is based in Rochester, New York, and the WDNY is where the alleged misconduct occurred with respect to the potential loan from the U.S. International Development Finance Corp. and the stock options to CEO James Continenza and chief financial officer David Bullwinkle.
"In other words, defendants hatched and sustained the very fraudulent scheme described in the complaint in WDNY," Judge Wolfson said in a written opinion.
The judge handed down that decision in addressing a motion from one of the three proposed lead plaintiffs — Les Investissements Kiz. Inc. and UAT Trading Service Inc., collectively referred to as the Kiz Group — to ship the case to the Southern District of New York, where a similar proposed class action is pending.
Another proposed lead plaintiff — known as the Satterwhite Group — said the matter should remain in New Jersey, and the third contender, John McMullan, did not take a position. Kodak said it did not oppose the Kiz Group's motion.
In opposing one another's arguments, however, the Kiz Group and the Satterwhite Group "make a far stronger case for venue in WDNY than in either of their preferred forums," the judge said in weighing "private interest factors."
The Kiz Group, for example, "admits that 'all statements made other than [the statement on CNBC's "Squawk Box"] occurred in Rochester,'" the judge said, referring to Continenza's July 29 appearance on the CNBC show to discuss the loan.
The proposed lead plaintiff has claimed "defendants made a 'key' false statement — about how investors could 'bank on' the [DFC] loan — in SDNY because [the CNBC show] broadcasts from that district," the judge wrote.
But Judge Wolfson noted that Continenza appeared on the show remotely, "from a location neither party can seem to identify, and hence could not have made representations or withheld information in SDNY."
"Moreover, in Kiz Group's own words, 'all other material connections to the alleged fraud [are] in Rochester,' which establishes WDNY as the center of gravity of this dispute," the judge said.
The judge also rejected the Kiz Group's argument that "Kodak is on the New York Stock Exchange ... where Continenza and Bullwinkle improperly traded in company stock," according to her opinion.
"These facts are not dispositive either, or else every securities action would wind up in SDNY," the judge added.
The lawsuit, which was initially filed by Kodak shareholder Tiandong Tang in August against the company, Continenza and Bullwinkle, largely centers on how Kodak's board of directors on July 27 gave 1.75 million and 45,000 stock options to Continenza and Bullwinkle, respectively, at conversion prices of between $3.03 and $12 per share.
After news broke about the DFC loan, which Kodak was expected to use in part to manufacture ingredients for COVID-19 drugs, Kodak's share price skyrocketed from $2.62 on July 27 to $33.20 on July 29, according to the complaint.
"This massive stock price increase allowed Defendant Continenza and other Kodak insiders to enrich themselves spectacularly from the compensation scheme, as their stock options were now very much 'in the money,'" the complaint said. "Continenza alone saw the value of his options go from zero to $50 million in just 48 hours."
Following media coverage about the stock options and related matters, the DFC on Aug. 7 said it would hold off on the deal, the complaint said.
Among other claims, Tang alleged "Continenza and Bullwinkle profited from material nonpublic information because the Board gave them stock options (convertible up to a much higher share price) before announcing the deal, on the near-certain knowledge that Kodak's value would soar as soon as the public became aware of the loan," according to the judge's opinion.
In weighing "public interest factors," Judge Wolfson noted Thursday that the District of New Jersey "faces the most significant backlog of cases in the country."
"As of December 31, 2020, we had the most civil filings, the second most pending cases, and the third most pending cases at least three years old. WDNY has a comparatively lower caseload, which favors transfer there," the judge said.
The WDNY also "has a strong interest in deciding a local controversy involving one of its biggest corporate citizens, and bearing virtually no relationship to any other place, at home," the judge added.
Reed R. Kathrein of Hagens Berman Sobol Shapiro LLP, representing the Satterwhite Group, told Law360 on Friday that "we think it is a well-reasoned decision as to where the case belongs."
Counsel for the Kiz Group and Kodak did not immediately respond to requests for comment Friday.
The Kiz Group is represented by Joel B. Strauss, Frederic S. Fox, Donald R. Hall, Pamela A. Mayer and William J. Pinilis of Kaplan Fox & Kilsheimer LLP and Christopher J. Keller, Eric J. Belfi, Francis P. McConville and David J. Schwartz of Labaton Sucharow LLP.
The Satterwhite Group is represented by Reed R. Kathrein, Lucas E. Gilmore, Danielle Smith and Steve W. Berman of Hagens Berman Sobol Shapiro LLP and Bruce D. Greenberg of Lite DePalma Greenberg LLC.
Kodak is represented by Stephen M. Baldini and Neal R. Marder of Akin Gump Strauss Hauer & Feld LLP.
The case is Tiandong Tang v. Eastman Kodak Co. et al., case number 3:20-cv-10462, in the U.S. District Court for the District of New Jersey.
--Editing by Andrew Cohen.
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